Equity capital markets: BB Seguridade shows the risk in Brazil
Local banks outgun global leads; Brasil Plural the latest ECM contender
Banco do Brasil’s BB Seguridade IPO last month raised R$11.48 billion ($5.7 billion), making it the largest IPO in Latin America since Santander’s IPO of its Brazilian bank in October 2009. It was also another high-water mark for the local banks in the continuation of their dominance of Brazilian equity mandates. Including the joint bookrunners (Brasil Plural and Banco Votorantim) six of the eight banks were locals, with only Citi and JPMorgan winning roles alongside Banco do Brasil, BTG Pactual, Bradesco BBI and Itaú BBA.
The deal is the first IPO mandate for Brasil Plural and marks the emergence of yet another local securities platform that will present the foreign banks in Brazil with added competition in an already crowded market. Brasil Plural’s management team almost exclusively comprises old Pactual partners that left the bank when Andre Esteves bought the business from UBS to create BTG Pactual. Seven of the nine members of the board are ex-Pactual. They were prevented by a noncompete clause from entering the securities business until July 2011 and so focused on advisory. Since then, however, Plural has been growing quickly: it bought a banking licence and in August 2012 finalized the acquisition of one of Brazil’s leading brokerage firms, Flow. The bank now has more than 300 employees, based mainly in São Paulo and Rio do Janeiro, but it also has a distribution office in New York, which was involved in marketing the BB Seguridade transaction.
Sebastien Chatel, co-head of equities at Brasil Plural and CEO of its brokerage operations, says the transaction is a breakthrough for the firm. "The deal was the largest IPO year-to-date and the largest ever in Brazil [and] it was our first IPO mandate," he says. "Bear in mind that obviously these things have a relatively long lead time and we have only been fully operational in terms of having a broker-dealer licence since late August , so I think that’s consistent."
Chatel says that although Brazil has become less popular for international investors in recent years, there is clearly still demand for consumer-related names. "Consumer names have done well and traded close to all-time-high valuations and that is the story that resonates with investors," he says. "Getting exposure to the Brazilian consumer is still something investors care for and the Banco do Brasil insurance business is something that gives exposure to those growth opportunities – it’s a high return on equity, asset-light model that investors like and another large-cap name that is being added to the index." Demand was reported to reach $11 billion. Chatel says: "there hasn’t been a large IPO for a while so just from that point of view investors had to look at it". Plural’s management team had long-standing relationships with Banco do Brasil dating back to Pactual’s involvement in Banco do Brasil’s equity transactions.
Deal volumes have picked up in 2013 ($18.7 billion from 32 deals compared with the same period in 2012 when there was $8.6 billion from 27 deals, according to Dealogic), but with so many banks trying to sustain expensive equity teams, rationalization is inevitable, according to a senior ECM banker who has recently left an international bank’s equity group in São Paulo.
"BB Seguridade is quite telling in the sense that it is further evidence of the clear trend that has been going on for quite a while, which is that the local banks have the upper hand," he says. "BTG Pactual has really built its practice on the back of the resurgence of the Brazilian capital markets since 2003 and then you saw Itaú BBA being formed and also taking market share – and the same, but with lesser success to date, with Bradesco BBI. I think now you will see people like Plural gaining share – just look at the Banco do Brasil [BB Seguridade] transaction – how many international banks were on that?"
He says that the local banks have done a good job in making clients pay for balance sheet with bookrunner mandates for their investment banks. He also says the locals have recruited effectively and have developed execution skills and international distribution to counter the international bank’s perceived differentiation "and they have done a really good job marketing against the international bank’s advantage in international distribution".
The locals also have deeper relationships. "After 2003 and 2004 Brazil started to grow really quickly and most of the investment banking business since then has come from emerging companies that were under the radar of the large banks," the ECM banker says. Rationalization has already begun: Barclays disinvested from Brazil after building its cash equities presence and there have been other important – if less clear cut – examples of departures of origination and equities research professionals from Deutsche Bank, Morgan Stanley and Bank of America Merrill Lynch. For the Brazilian on gardening leave, the trend to locals is strong enough to steer him to join a local investment bank, even if the internationals were actively recruiting. He says that the move of Facundo Vazquez [former head of Latin American ECM for Bank of America Merrill Lynch] to Itaú BBA is emblematic: "Facundo isn’t Brazilian. He doesn’t live in Brazil. And yet he’s joined Itaú. I think that speaks volumes."